Skype Facing Legal Troubles

Skype has quickly become an Internet phenomenon, appealing to a broad variety of customers with its instant messaging, video chat, and phone services. (I personally became a fan during my study abroad with the Vanderbilt in Venice summer program.) For the uninitiated, Skype allows you to make free Skype-to-Skype phone calls through the Internet and to make local, long-distance, and international calls for a fee (usually less than traditional phone companies and calling cards). The company, currently owned by eBay, Inc., appears to be doing well, with 480 million registered users and over half a billion dollars in revenue last year. In April of this year, eBay announced that it was spinning off Skype as a separate company in an IPO planned for early 2010. (See the legalese.)

Despite the rosy outlook, legal troubles are beginning to mount for Skype. In June 2006, Net2Phone filed a complaint against eBay alleging infringement on five of its patents relating to point-to-point Internet protocol. (District of New Jersey, No. 06-2469.) The litigation is still tied up in pretrial hearings, with a claim construction hearing date next month (September 2009).

Additionally, Skype has recently entered into a legal battle with Joltid Limited. The lawsuit, originally filed by Skype against Joltid in the English High Court of Justice (No. HC 09C00756), resulted from disputes regarding a technology licensing agreement. When eBay purchased Skype in 2005, it did not buy the P2P networking technology that powers Skype, but rather acquired usage rights through a licensing agreement with Joltid, a company formed by the creators of Skype. Relationships later soured, and now both companies are alleging breach of the agreement. Meanwhile, “Skype has begun to develop alternative software to that licensed through Joltid.” (See Form 10-Q, pg. 15.)

However, eBay is not overly optimistic about the success of the lawsuit or the alternative software development: “[S]uch software development may not be successful, may result in a loss of functionality or customers even if successful, and will in any event be expensive.” If the company loses the suit and/or fails to develop an acceptable substitute system, “Skype would be severely and adversely affected and the continued operation of Skype’s business as currently conducted would likely not be possible.” A trial date has not yet been set, so Skype users will likely be waiting for some time to discover whether the system as we know it will continue to exist.

As eBay notes in its quarterly filing, this is not the last of the infringement suits it expects to see. New technology seems to spawn patent and licensing litigation. While this particular lawsuit may not implicate novel legal issues in the interpretation of licensing and patents, it does raise important questions about the efficacy of business plans in the technology sector. When eBay purchased Skype, for $2.6 billion, it failed to acquire the company’s most important asset: the technology that made it work. If companies continue to follow this business model, we will likely see a great deal more of this type of lawsuit in the future.

One Response to Skype Facing Legal Troubles

I haven’t been able to locate the London-based JoltId lawsuit… maybe you can fill me in? If Skype only revealed Joltid’s tech in response to anorder from a US court, wouldn’t that be OK? Or are there safeguards that Joltid could have been expected to have in place first? Or should that decision have been up to Joltid?